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In this year in which bank foreclosure properties are more abundant than any time in our history, the advantages to buying properties from homeowners in default can only be measured by the individual investor. A lot of people have objections to doing this, some think it’s too risky, while others are troubled by ethical considerations. Are you helping the troubled homeowner or taking advantage of his misfortune?
Both the lender and the homeowner lose in a foreclosure action. Neither want it to happen. Both parties are motivated to resolve the situation. Motivated parties are key to the process.
The investing window of opportunity opens the day the Lis Pendens, the legal notice that a action is is on its way, is filed. The window closes the day the property is sold at auction. The time between these two events enables an investor to work with the homeowner and lender to create a workout strategy or a purchase of the property from the homeowner before the sale date.
The amount of time that is the window of opportunity is open depends solely on state and local laws, as well as the behavior of the property owner. Some states sell properties within ninty to 120 days from the first notice of default. In New York, the process can take a year or more.
As for the moral question, keep in mind that by dealing with a homeowner in default, you not only help him, you generally rescue the loan and maintain the value of the property (and surrounding properties) as well. If there is enough equity in the property, there is the potential to work out an arrangement that satisfies all parties and allows for a handsome profit. That’s what pre-foreclosure investing is all about: buying the equity in the property, working out an arrangement with the lender and the homeowner, then selling the property for a profit.
Investors follow these basic guidelines to ensure a successful purchase and sale:
Locating Loans in Default
The Lis Pendens is the first legally require public notice that announces a loan in default, so it makes sense to start there. Access these notices at the county courthouse, newspapers that routinely advertise these notices or through a reputable Foreclosure Service Provider.
Evaluate Selections & Determine Potential
You know the default amount from the legal notices or service provider’s information. Now you must estimate the property’s market value. Subtract the default amount from the estimated market value to determine the gross equity in the property. This figure also reflects your gross profit potential. If there is little or no difference in the amount of debt and the market value, move on to another property. If there is a big difference, there may be enough equity in the property to make a sizeable profit.
Contact the Homeowner
This is easier said then done. The homeowner is probably being bombarded with letters and calls from attorneys and bill collectors and has creditors showing up at his door. The only way to contact the homeowner is by phone, mail or in person, and chances are you will have a difficult time getting in touch with him.
Start with mailings. Indicate in your letter that you are a private investor looking for property in that part of town. Let the property owner know that you may be able to help him with his financial problems.
Demonstrating an understanding the homeowner’s dilemma will help your efforts. Indicate in your letter that you may be able to stop the foreclosure, save his credit rating and provide cash for use in paying his bills and/or for relocating.
Be professional and gracious in your correspondence. Invite the homeowner to call you at his convenience. If you don’t hear from him in a reasonable amount of time, say three or four weeks, follow up with another letter, perhaps worded a bit more urgently. As you get closer to the auction date you may want to send two or more letters per month.
Follow up with phone calls if you can. Be courteous, never pushy. Never interview the owner on the phone. Merely state that in order to determine whether or not you can help him, you will need to meet with him at the property. Make sure he understands that the meeting will be more productive and less time consuming if he will have the loan, mortgage and insurance documents available, as well as the foreclosure notices.
If you are going to make an offer on the property, you must have the loan, ownership, and debt or lien information. You must also assess the condition of the property and the property owner. Combined with the market value and the default amount, you have all the ingredients necessary to formulate your offer.
If you feel comfortable with it, you can visit the property in person. You may be confronted by an angry homeowner. Be polite and leave if you are asked to. Never, under any circumstance, snoop around, inspect or generally trespass unlawfully on somebody’s property.
So if you feel right, seize this moment and make a profit.
